Thinking | 31 July 2007

Do you need PI Cover?

On 23 July ASIC released a consultation paper on its proposals for administering the new compensation and professional indemnity insurance requirements. The new requirements were introduced by the Corporations Regulation 7.6.02AAA on 28 June 2007 (Regulations). These requirements apply to AFSL holders that provide financial services to retail clients.

The Regulations provide that the primary method of compliance with the obligation is for licensees to obtain professional indemnity insurance and that the level of cover should be adequate. However, some licensees may rely on alternative arrangements or guarantees from a related company who is regulated by the Australian Prudential Regulation Authority (APRA).

The new obligations under reg 7.6.02AAA will commence on 1 January 2008 (ie those persons granted a licence from 1 July 2007) for new licensees and 1 July 2008 for existing licensees.

The Regulations provide that general insurance companies, life insurance companies and authorised deposit taking institutions regulated by APRA are exempt from the compensation requirements. Licensees who are related to exempt APRA-regulated entities are also exempt where they have a guarantee in place from the APRA-regulated entity that has been approved by ASIC.

In general, ASIC has proposed that:

  • a licensee’s PI insurance policy should have a per claim limit at least as high as the maximum monetary limit that applies to their external dispute resolution scheme (EDR) scheme(s)
  • for insurance brokers, the policy should maintain the aggregate amount of cover which would have been required under the superseded Insurance (Agents and Brokers) Act 1984
  • for other licensees:RA
    • the appropriate measure of a licensee’s size is the total gross revenue derived from the licensee’s dealings with retail clients and the
    • minimum aggregate cover should be assessed on a sliding scale as follows:
      • for licensees whose actual or expected revenue from retail services is up to $1 million – minimum $2 million cover
      • for licensees with revenue greater than $1 million – minimum cover should be two times actual or expected revenue from retail services (up to a capped minimum of $20 million cover)
  • the policy objective and the legislation require the following as key features of an adequate PI insurance policy:
  • the policy must cover loss or damage suffered by retail clients because of breaches of obligations under Chapter 7 of the Corporations Act
  • the policy must cover breaches by both the licensee and its representatives
  • the policy must be available to cover compensation awards made by the EDR to which the licensee belongs and
  • as far as possible, the policy must continue to provide cover for a period of time after the licensee ceases business (e.g. run-off cover).

ASIC has commissioned research which indicates that current polices in respect of professional indemnity insurance products would not be adequate for ASIC purposes, in general, because of certain exclusions such as fraud, representatives acting outside the scope of their authority of and products not on an ‘approved product list’. In these circumstances ASIC has proposed that any shortfall be made up by a licensee using its own financial resources. ASIC has proposed a procedure which will help licensee assess whether or not they have adequate financial resources to meet such claims. It is envisaged that this requirement will need to be addressed in Regulatory Guide 166.

ASIC will accept applications for alternative arrangements to be assessed on a case by case basis. However, alternative arrangements will not be approved unless they provide no less protections than adequate PI cover.

The consultation paper seeks feedback on:

  • ASIC’s proposed policy on what is adequate professional indemnity insurance cover
  • some challenges to the regime and some practical options responding to these challenges
  • ASIC’s proposed guidance on how licensees should approach the new requirements and
  • ASIC’s policy for approving alternative arrangements to professional indemnity insurance.

ASIC invites comments on the proposals set out in the consultation paper by 14 September 2007.

Please let us know if we can assist you in determining how these requirements affect your business.


Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

John Bassilios

John has broad experience in financial services, funds management, blockchain, corporate and corporate law.

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